TLDR:
- xAI seeks to raise $5 billion in debt through Morgan Stanley, offering high-yield loans to attract private investors.
- The company is also targeting $20 billion in equity funding, aiming for a valuation of up to $200 billion.
- Morgan Stanley’s cautious ‘best efforts’ approach reflects broader market hesitancy around early-stage AI firms.
- Despite bold growth projections, xAI faces mounting pressure to demonstrate commercial viability and operational discipline.
xAI, the artificial intelligence startup founded by Elon Musk, is seeking to raise $5 billion in debt through a financing deal being marketed by Morgan Stanley.
The offer comprises a mix of bonds and loans, including a floating-rate term loan priced at a discount and pegged at a steep interest margin over SOFR, as well as an alternative fixed-rate option set at 12 percent. The structure suggests xAI is navigating a cautious financial environment, where lenders are pressing for high returns to offset perceived risk.
High Interest Rates Reflect Economic Headwinds
The deal marks a strategic shift in Musk’s financing playbook. While previous ventures like Tesla and SpaceX were famously supported by government subsidies and federal loans, xAI is relying more heavily on private capital. This evolution underscores how even established entrepreneurs must adapt to current monetary policy and risk appetites. The steep pricing, particularly the 700 basis point spread over SOFR, speaks to prevailing interest rate conditions and investor wariness over AI startups that are not yet profitable.
Morgan Stanley’s decision to proceed with a “best efforts” model, rather than fully underwriting the issue, reflects industry caution. In a climate of elevated rates and financial tightening, banks are increasingly hesitant to commit capital to early-stage ventures, even those backed by high-profile founders. This stands in contrast to Morgan Stanley’s involvement in Musk’s 2022 acquisition of X (formerly Twitter), where it took on greater exposure. With xAI, the approach is far more risk-averse.
Valuation Ambitions Remain Sky-high
In parallel to the debt deal, xAI is reportedly engaged in discussions to secure as much as $20 billion in equity funding. If successful, the round could value the company anywhere between $120 billion and $200 billion, placing it among the most valuable AI firms globally. This aggressive valuation range reflects both Musk’s personal brand and investor appetite for AI ventures, though it remains to be seen whether fundamentals will support such lofty numbers.
The appetite for AI remains strong, but investors have grown more discerning. While recent years saw speculative capital flow into anything labeled “AI,” the funding climate has shifted. There is now greater emphasis on tangible revenue streams, product-market fit, and long-term scalability. xAI will need to deliver more than vision and celebrity.
According to projections by Morgan Stanley last week, xAI could reach $1 billion in revenue by the end of 2025 and grow its EBITDA to over $13 billion by 2029. Yet recent filings reveal a $341 million EBITDA loss in the first quarter of 2025, suggesting a long road ahead before profitability.
Capital-intensive roadmap raises pressure to deliver
The company’s expansion plans are equally ambitious. xAI has already spent $2.6 billion on capital expenditures and expects to invest another $18 billion in building out data centers. This level of spending puts pressure on the company to secure funding quickly while executing efficiently. With rising scrutiny from regulators and heightened expectations in the AI space, xAI must balance innovation with fiscal discipline.
As the financing process unfolds, investor interest in the outcome will be high. If Musk can pull off another mega-raise in a challenging market, it would reinforce his status as one of tech’s most bankable figures. But in this new interest rate environment, even Elon Musk will need to prove his next big idea can survive without government lifelines.
